Church Records

By Richard R. Hammar, J.D., LL.M., CPA

© Copyright 1991, 1998 by Church Law & Tax Report.  All rights reserved.  This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service.  If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m12

Each corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its members, board of directors and committees having any of the authority of the board of directors; and shall keep at its registered office or principal office in this State a record giving the names and addresses of its members entitled to vote. All books and records of a corporation may be inspected by any member, or his agent or attorney, for any proper purpose at any reasonable time.¹

The “Revised Model Nonprofit Corporation Act,” which has been adopted in a few states (but which likely will be adopted by several more) specifies:

(a) A corporation shall keep as permanent records minutes of all meetings of its members and board of directors, a record of all actions taken by the members or directors without a meeting, and a record of all actions taken by committees of the board of directors . . . .

(b) A corporation shall maintain appropriate accounting records.

(c) A corporation or its agent shall maintain a record of its members in a form that permits preparation of a list of the name and address of all members, in alphabetical order by class, showing the number of votes each member is entitled to cast.

(d) A corporation shall maintain its records in written form or in another form capable of conversion into written form within a reasonable time.

(e) A corporation shall keep a copy of the following records at its principal office:

(1) its articles or restated articles of incorporation and all amendments to them currently in effect;

(2) its bylaws or restated bylaws and all amendments to them currently in effect;

(3) resolutions adopted by its board of directors relating to the characteristics, qualifications, rights, limitations and obligations of members or any class or category of members;

(4) the minutes of all meetings of members and records of all actions approved by the members for the past three years;

(5) all written communications to members generally furnished within the past three years, including the financial statements furnished for the past three years under section 16.20;

(6) a list of the names and business or home addresses of its current directors and officers; and

(7) its most recent annual report delivered to the secretary of state . . . .¹

Churches incorporated under statutes other than the Model Nonprofit Corporation Act (or the revised Act), and unincorporated churches, often are under no legal obligation to maintain records.

All records should be as complete as possible, which means that each record should be dated and indicate the action taken, the persons present, and the voting results if any. It is often helpful to include a brief statement of the purpose for each action if it would not otherwise be clear. The secretary of the board of directors usually is the custodian of the corporate records; records of account customarily are maintained by the treasurer.

Finally, the income tax regulations state that “any person subject to tax . . . shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax . . . .”²

Section 25 of the Model Nonprofit Corporation Act, previously quoted, gives members of an incorporated church the right to inspect corporate records for any proper purpose at any reasonable time. The Revised Model Nonprofit Corporation Act gives members broad authority to inspect corporate records, but specifies that “[t]he articles or bylaws of a religious corporation may limit or abolish the right of a member . . . to inspect and copy any corporate records.”³ Can a church incorporated under the Model Nonprofit Corporation Act refuse a member's request to inspect church records on the ground that such a right conflicts with the church's constitutional guaranty of religious freedom? The courts have reached conflicting answers to this question. One court ruled that members of a church incorporated under the Model Nonprofit Corporation Act do not have a right to inspect church records if doing so would “impinge upon the doctrine of the church.”⁴ When church elders rejected members' requests to inspect church records, the members incorporated the church under a state nonprofit corporation law making the “books and records” of a corporation subject to inspection “by any member for any proper purpose at any reasonable time.” Church elders continued to reject the members' request for inspection, whereupon the members asked a state court to recognize their legal right to inspection under state corporation law. The elders countered by arguing that application of state corporation law would impermissibly interfere with the religious doctrine and practice of the church, contrary to the constitutional guaranty of religious freedom. Specifically, the elders argued that according to the church's “established doctrine,” the New Testament “places within the hands of a select group of elders the sole responsibility for overseeing the affairs of the church,” and that this authority is “evidenced by biblical admonitions to the flock to obey and submit to them that have rule over the flock.” The state supreme court agreed that “application of our state corporation law would almost certainly impinge upon the doctrine of the church” as described by the elders, and accordingly would violate the constitutional guaranty of religious freedom. The court relied in part on a 1952 decision of the United States Supreme Court in which the Court ruled that religious freedom includes the right of religious bodies “to decide for themselves, free from state interference, matters of church government as well as those of faith and doctrine.” The court concluded that if the application of a state law would conflict with the “doctrine, polity, or practice” of a church, then the law cannot be applied to the church without a showing of a “compelling state interest.” No such showing was made in this case, the court concluded, and therefore the state law giving members of nonprofit corporations the legal right to inspect corporate records could not be applied to the church.

On the other hand, other courts have rejected the claim that the first amendment insulates church records from inspection by members. To illustrate, members of one church sought a court order authorizing them to examine the church's financial records. The church was incorporated under the state's general nonprofit corporation law, which gave members the right to inspect corporate records at any reasonable time. The church and its pastor objected to the inspection on the ground that the first amendment prohibits the courts from involving themselves in church affairs. The court disagreed with this contention, concluding that “first amendment values are plainly not jeopardized by a civil court's enforcement of a voting member's right to examine these records.”⁵

It is doubtful that most courts would permit churches incorporated under the model Act to refuse members' requests to inspect church records on the basis of the first amendment guaranty of religious freedom unless the church could demonstrate that (1) its refusal to permit members to inspect church records “was motivated by and rooted in legitimate and sincerely held religious belief,” (2) its religious beliefs opposing inspection of its records by members would be “unduly and substantially burdened by the [right to inspect],” and (3) no compelling governmental interest supported the inspection right. This is the standard analysis applied by the civil courts in evaluating claims under the first amendment's “free exercise of religion” clause (a “compelling governmental interest” may no longer be required with respect to “neutral laws of general applicability”).  It is unlikely that most churches could prove that a decision to deny members the right to inspect church records was based on “sincerely held religious beliefs” that would be “substantially burdened” by a recognition of the right to inspect. Churches accordingly should not assume that the first amendment permits them to deny inspection rights given to members under state corporation law.

Members of churches not incorporated under the Model Nonprofit Corporation Act rarely have a statutory right to inspect church records. Such a right may be given by the bylaws or charter of a church corporation or association. Some courts have held that members inherently possess a limited right of inspection even if the right is not expressly granted by statute, bylaw, or charter.

A right of inspection, however, generally applies only to members. Persons who are not members of a church have no right to demand inspection of church records. As has been mentioned elsewhere, the Privacy Act and Freedom of Information Act have no application to religious organizations.⁶ Churches that raise funds by issuing securities (i.e., bonds or promissory notes), may be required by state securities laws to allow investors—whether members or not—to inspect the financial statements of the church.

Do church members have the authority to obtain a court order requiring an “accounting” of church funds? No, concluded a state appeals court. A group of church members who had contributed funds to their church demanded that the church give an “accounting” of the use of the contributed funds. When the church refused, the members turned to the courts for relief. A trial judge ordered an immediate accounting, as well as annual audits “forever,” and required the church to disclose the contents of a church safety deposit box to the complaining members. The church appealed, arguing that the civil courts had no jurisdiction over a church, and even if they did, they had no authority to order accountings or annual audits. A state appeals court, in upholding the trial judge's ruling regarding an accounting and inspection of the church's safety deposit box, observed that “we are of the opinion that this is not an improper interference by the government into a church, or ecclesiastical, matter. When the members of the church decided to incorporate their body under the laws of the state of Florida, they submitted themselves to the jurisdiction of the state courts in all matters of a corporate nature, such as accounting for funds.” However, the court reversed the trial judge's order requiring annual audits forever, since “we cannot agree it is proper to order annual, ad infinitum, audits of the books” of a church.⁷

Members and nonmembers alike may compel the production (i.e., disclosure) or inspection of church records as part of a lawsuit against a church if the materials to be produced or inspected are relevant and not privileged. For example, Rule 34 of the Federal Rules of Civil Procedure, adopted by several states and used in all federal courts, specifies that any party to a lawsuit

may serve on any other party a request (1) to produce and permit the party making the request, or someone acting on his behalf, to inspect and copy, any designated documents . . . which are in the possession, custody or control of the party upon whom the request is served; or (2) to permit entry upon designated land or other property in the possession or control of the party upon whom the request is served for the purpose of inspection . . . .

Similarly, Rule 45(b) of the Federal Rules of Civil Procedure states that a subpoena may command the person to whom it is directed “to produce the books, papers, documents, or tangible things designated therein . . . .” Rule 45 also stipulates that a subpoena may be quashed or modified if it is “unreasonable and oppressive.” Federal, state, and local government agencies are also invested with extensive investigative powers, including the right to subpoena and inspect documents. However, this authority generally may not extend to privileged or irrelevant matters.

Since church records are not inherently privileged, they are not immune from production or inspection. Although most states consider confidential communications to be privileged when they are made to a clergyman acting in his professional capacity as a spiritual adviser, several courts have held that the privilege does not apply to church records. For example, in upholding an IRS subpoena of the records of a religious corporation over its objection that its records were privileged, one federal court observed that the “contention of violation of a penitent--clergyman privilege is without merit. A clergyman must be a natural person.”⁸ Another court, in upholding the admissibility of a church membership registration card over an objection that it was privileged, noted that “this information by any flight of the judicial imagination cannot conceivably be considered as a confession made to [a clergyman] in his professional character in the course of discipline . . . and, of course, is not privileged.”⁹

A New York state court ruled that a church's books and records were subject to government inspection as part of an investigation into alleged wrongdoing in soliciting contributions.¹⁰ The state attorney general received reports that the church forced residents of its homeless shelter to “panhandle” contributions on the streets in exchange for room, board and 25 percent of the moneys collected. There also were allegations that most of the contributions were appropriated for the personal benefit of the church's founder. Accordingly, the attorney general issued a subpoena to the church, directing it to make available for inspection its (1) books and records, (2) leases and deeds, (3) minutes of its governing body and the names and addresses of all directors, officers, and trustees, and (4) copies of all materials used to solicit contributions.

The church refused to respond to this subpoena on the ground that it violated its “religious rights.” In rejecting the church's claim, the court observed: “There is no doubt that the attorney general has a right to conduct investigations to determine if charitable solicitations are free from fraud and whether charitable assets are being properly used for the benefit of intended beneficiaries.” It makes no difference whether or not the organization soliciting the donations is a church or other religious organization, since “religious corporations . . . are still within the attorney general's subpoena power, and investigations by the attorney general of alleged fraudulent behavior may proceed based upon law and the public interest against fraudulent solicitations by so--called religious groups.”

The court emphasized that the attorney general's investigation did not prevent the church or its members “from practicing their religious activity, nor is it disruptive to such activity.” The court concluded:

At a time when there is acute sensitivity to the plight of the homeless, the public, the press and the courts must be acutely aware of the possibility that the unscrupulous might prey on the warm heartedness and generosity of the community, and attempt to profit from human misery. At the very least, when such allegations exist and have some degree of evidentiary support, we cannot close our eyes to the possibilities of abuse. The mere fact that a charitable group claims first amendment privileges cannot shield that group from the scrutiny of the attorney general.¹¹

Churches and religious denominations should be aware that their applications for exemption from federal income taxation (Form 1023) and related materials are now subject to public inspection.¹²

Generally, “exempt organizations” (including churches and religious denominations) must make available a copy of the following materials in response to a request from a member of the public: (1) the exemption application form (Form 1023); (2) any supporting documents submitted with the exemption application, including legal briefs or a response to questions from the IRS; and (3) any letter or document issued by the IRS with respect to the exemption application (such as a favorable determination letter or a list of questions from the IRS about the application). An exempt organization is not required to provide a photocopy of its exemption application to a requester, but is required to have on hand a copy available for inspection. The organization may have an employee present in the room during the inspection, but must allow the requester to take notes freely during the inspection or must allow the requester to photocopy the document on the requester's own photocopying equipment “within reasonable constraints of time and place.” Alternatively, if a requester prefers his or her own copy and the organization does not object to making a photocopy to give to the requester, the organization may make the copies on its own equipment and charge the requester $1 for the first page and 15 cents for each additional page plus any actual postage costs. The required information “should normally be available on the day of the request for inspection and during the normal business hours of the organization's office.”

An organization that fails to comply with a request for inspection may be assessed a penalty of $10 per day up to a maximum of $5,000. A willful failure to comply may result in a penalty of $1,000. The IRS notice also provides that “if an organization filed its application before July 15, 1987, it is required to make available a copy of its application only if it had a copy of the application on July 15, 1987.” Many churches never filed an exemption application with the IRS because they are covered by a “group exemption” obtained by their denomination. If such a church receives a request for inspection of its exemption application, it “must acquire from the parent organization a copy of those documents that were submitted to the IRS by the parent organization . . . and make the material available to the requester in a reasonable amount of time.” Alternatively, the requester may obtain the information directly from the parent organization. Finally, if an exempt organization maintains one or more “regional or district offices,” the exemption application (and related materials) “shall be made available at each such district or regional office as well as at the principal office.” This rule will be relevant to many religious denominations. Churches and religious denominations should be aware of these new requirements, since some undoubtedly will be receiving requests for inspection.

Whether the government has the right to compel religious organizations to release the names of members and contributors is a hotly contested issue. In 1958, the United States Supreme Court ruled that the freedom to associate with others for the advancement of beliefs and ideas is a right protected by the first amendment against governmental infringement, whether the beliefs sought to be advanced are political, economic, religious, or cultural.¹³ The Court acknowledged that the right of association is nowhere mentioned in the first amendment, but it reasoned that such a right must be inferred in order to make the express first amendment rights of speech and assembly more secure. The court concluded that an order by the State of Alabama seeking to compel disclosure of the name of every member of the National Association for the Advancement of Colored People in Alabama constituted an impermissible restraint upon members' freedom of association, since

on past occasions revelation of the identity of its rank--and--file members has exposed these members to economic reprisal, loss of employment, threat of physical coercion, and other manifestations of public hostility. Under these circumstances, we think it apparent that compelled disclosure of [the NAACP's] Alabama membership is likely to affect adversely the ability of [the NAACP] and its members to pursue their collective effort to foster beliefs which they admittedly have the right to advocate, in that it may induce members to withdraw from the Association and dissuade others from joining it . . . .¹⁴

It is clear that governmental actions that may have the effect of curtailing the freedom of association are subject to the closest scrutiny. Yet case law makes it clear that the right to associate is not absolute; a “significant interference” with the right may be tolerated if the government (1) avoids unnecessary interference, (2) demonstrates a sufficiently important interest, and (3) employs the least intrusive means of achieving its interests.¹⁵

The Supreme Court has observed that “[d]ecisions . . . must finally turn, therefore, on whether [the government] has demonstrated so cogent an interest in obtaining and making public the membership lists . . . as to justify the substantial abridgement of associational freedom which such disclosures will effect. Where there is a significant encroachment upon personal liberty, the state may prevail only upon showing a subordinating interest which is compelling.”¹⁶

Government demands for the production and inspection of membership and contributor lists frequently are approved on the ground that a compelling governmental interest exists. For example, in one case, a federal appeals court upheld the enforcement of an IRS summons seeking the name of every individual who had contributed property other than securities to Brigham Young University (BYU) for the tax years 1976, 1977, and 1978.¹⁷ Before issuing the summons, the IRS had audited the returns of 162 taxpayers who had contributed property to the university during the years in question. In each instance the amount of the contribution claimed by the taxpayer was overvalued, and in many cases grossly overvalued. As a result, the IRS surmised that many other contributors had overvalued their contributions as well.

The university challenged the summons on the ground that the IRS was without a reasonable basis for believing that the remaining contributors had overvalued their contributions. The university further asserted that the information sought was readily available to the IRS through its own files, and that enforcement of the summons would infringe upon the contributors' freedom of association under the first amendment.

The court, in upholding the summons, observed that “having previously examined the returns of some 162 donors of gifts in kind to BYU and having found that all were overvalued, the IRS has established a reasonable basis for believing that some of the remaining donors of in kind gifts may have also overvalued their gifts.”¹⁸

In another case, the Federal Communications Commission (FCC) received complaints that a religious broadcaster was not expending contributed funds as indicated in over--the--air solicitations. As part of its investigation, the FCC ordered the broadcaster to divulge the names of all contributors and the amount of each contribution. The broadcaster refused to comply on the ground that such information was protected by the first amendment freedoms of religion and association. An FCC administrative tribunal ruled that under the circumstances the agency had a compelling interest in obtaining disclosure of the names of contributors and the amounts of contributions, and that this interest outweighed the freedoms of religion and association. A federal appeals court affirmed this determination on the grounds that (1) the government has a compelling interest in preventing the diversion of funds contributed for specific, identified purposes, especially when such funds are obtained through the use of the public airwaves, which, by congressional mandate, must be operated in the public interest; (2) the allegations of diversion of funds were made by a former employee and therefore they were entitled to a greater inference of reliability; (3) the government's investigation was narrow and avoided unnecessary interference with the free exercise of religion; and (4) the government's request for records was necessary to serve its compelling interest in investigating the alleged diversion of funds.¹⁹

A New York state court ruled that the constitutional guaranty of religious freedom did not excuse a church from producing its records in response to a grand jury subpoena. During a tax investigation, the state attorney general subpoenaed several records and documents from a church (including general ledgers, accounts payable and receivable journals, 941 and W--2 forms, cash receipts and disbursement journals, bank statements, canceled checks, postal shipment records, employee travel expense records, telephone bills, the corporate charter, minutes of board meetings, and credit card statements). The church challenged the validity of the subpoena on the ground that disclosure of the documents would violate the constitutional rights of the church and its members. The court noted that the church had to “make at least some showing that production of the information sought would impair their first amendment rights” and that “once such a showing is made, the prosecution has the burden of establishing that the infringement is outweighed by a compelling state interest to which the information sought is substantially related, and that the state's ends may not be achieved by less restrictive means.”

Church representatives argued that disclosure of the records would reveal the identities of contributors to the church in violation of the church's belief (based on Matthew 6:1--4) that “charity should be given in secrecy.” The court rejected the church's claim that disclosure of many of the requested records would violate the church's right to religious freedom. For example, the court observed that “it is hard to conceive that release of charge or credit account records, or records of employees' travel expense accounts, would have any likelihood whatsoever” of violating any religious beliefs or tenets of the church. The court agreed that the church “sufficiently substantiated” that disclosure of some records would violate contributor's constitutional guaranty of religious freedom. It cited cash receipts records and bank statements. The court further agreed that disclosure of records revealing the charitable recipients of church funds (e.g., canceled checks and bank statements) also might violate the church's rights. The court emphasized that “the fact that disclosure of the items would directly violate the denominational belief that church contributions should be kept secret is only the beginning, however, and not the end of the inquiry.” The church would be required to disclose the constitutionally protected records if the state could establish that the alleged violation of the church's rights was outweighed by a “compelling state interest to which the information sought is substantially related” and that the “state's ends may not be achieved by less restrictive means.”  The court concluded that such was the case here, since the church's records were sought in connection with an investigation into tax--related offenses including underreporting of compensation paid to officers and employees and diversion of church funds to nonreligious purposes, and “it is by now well settled that enforcement of a state's revenue laws constitutes a compelling governmental interest.” The court also concluded that there “was no less restrictive means for obtaining the relevant evidence of the violations of law under investigation,” and therefore the church's “first amendment objections to the subpoenas are unavailing.” The court did acknowledge that the subpoenas “did not seek either general membership lists or general lists of contributors to or charitable donees of the [church],” and that “disclosure of the identities of specific contributors was incidental to the effort to uncover the flow of money and property in and out of the [church], and an indispensable part of the grand jury's investigation.” In other words, since general membership or contributor lists were not relevant to the grand jury's inquiry, they may have been protected from disclosure had they been specifically sought by the attorney general. This case is significant because it is one of the few published opinions to discuss the validity of a church's objections to attempts to subpoena its records. Many churches assume that their records enjoy a mantle of secrecy and are immune from the subpoena power. The New York case recognizes that this assumption is flawed, even with respect to records whose disclosure would admittedly violate the church's religious beliefs.²⁰

One court ruled that the right to associational privacy extends to private lawsuits as well as governmental investigations, and thus a litigant has no right to compel disclosure of the membership list of a church unless he can establish a compelling state interest justifying disclosure.²¹

As noted previously, section 7611 of the Internal Revenue Code defines those church records that are subject to the IRS subpoena power to include church membership and donor lists.

It is clear, however, that when the identities of all members or contributors are not reasonably relevant to a particular governmental investigation, the government's interest in disclosure will not be sufficiently compelling to outweigh the constitutionally protected interests of members and contributors.²² Finally, neither the Privacy Act of 1974 nor the Freedom of Information Act applies to church records.²³

Section 7602 of the Internal Revenue Code gives the IRS broad authority to examine or subpoena the books and records of any person or organization for the purposes of (1) ascertaining the correctness of any federal tax return, (2) making a return where none has been filed, (3) determining the liability of any person or organization for any federal tax, or (4) collecting any federal tax. This authority has been held to apply to churches.²⁴

As part of the Tax Reform Act of 1969, Congress amended section 511 of the Internal Revenue Code to extend the federal tax on the unrelated business income of tax--exempt organizations to churches and religious denominations. In general, unrelated business income constitutes income from a regularly carried on trade or business not substantially related to the exempt purposes of a tax--exempt organization. The amendment of section 511 represented a major change in the treatment of churches and denominations, previously exempt from most federal taxes, including unrelated business income taxes. The Tax Reform Act of 1969 also added section 7605(c) to the Internal Revenue Code:

No examination of the books of account of a church or convention or association of churches shall be made to determine whether such organization may be engaged in the carrying on of an unrelated trade or business or may be otherwise engaged in activities which may be subject to [the tax on unrelated business income] unless the Secretary (such officer being no lower than a principal internal revenue officer for an internal revenue region) [1] believes that such organization may be so engaged and [2] so notifies the organization in advance of the examination. No examination of the religious activities of such an organization shall be made except to the extent necessary to determine whether such organization is a church or a convention or association of churches, and no examination of the books of account of such an organization shall be made other than to the extent necessary to determine the amount of tax imposed by this title.²⁵

Because amended section 511 created new tax liability for churches and denominations, the addition of section 7605(c) was considered necessary to protect such organizations from excessive tax audits by IRS agents investigating unrelated business activities. Accordingly, the first sentence of section 7605(c) shielded the books of account of churches and denominations from any IRS examination for the purpose of determining any unrelated business income tax liability unless the IRS (1) had some basis for believing that such an organization was engaged in an unrelated trade or business, and (2) notified the organization in advance of the examination.

Prior to 1985, some churches argued that section 7605(c) prohibited any IRS examination of church records not undertaken to determine whether a church was engaged in an unrelated trade or business. While it is true that section 7605(c) was enacted primarily in response to the application of the unrelated business income tax to churches and religious organizations, it certainly did not suggest that churches and religious denominations could not be examined under any other circumstances. Churches and denominations, for example, remained liable for withholding and paying employment taxes on nonminister employees and for the payment of certain excise taxes; and they were subject to the IRS examination power to ensure that they were properly complying with such requirements. Section 7605(c) did not negate such authority. On the contrary, the second sentence of that section specifically recognized the authority of the IRS to examine (1) the religious activities of a church or denomination to the extent necessary to determine if it were in fact entitled to tax--exempt status, and (2) the books of account of a church or denomination to the extent necessary “to determine the amount of tax imposed” under any internal revenue law (including income, employment, and excise taxes). The view that section 7605(c) acknowledged the preexisting authority of the IRS to examine the activities and records of churches and denominations to ensure compliance with income, employment, and excise taxes and entitlement to tax--exempt status was endorsed by the courts²⁶ and legislative history,²⁷ and was embodied in the income tax regulations.²⁸

Section 7605(c) was criticized for its failure to provide adequate guidelines and for its insensitivity to the unique protections afforded churches by the first amendment's free exercise of religion clause. Such criticism led to the repeal of section 7605(c) in the Tax Reform Act of 1984 and the enactment of the Church Audit Procedures Act as section 7611 of the Internal Revenue Code. Section 7611 imposes detailed limitations on IRS examinations of churches for tax years beginning in 1985 or thereafter. The limitations can be summarized as follows:

1. The IRS may begin a church tax inquiry (defined as any inquiry to determine whether a church is entitled to tax--exempt status as a church or is engaged in an unrelated trade or business) only if (a) an appropriate high--level Treasury official (defined as a regional IRS commissioner or higher official) reasonably believes on the basis of written evidence that the church is not exempt²⁹ (by reason of its status as a church), may be carrying on an unrelated trade or business, or is otherwise engaged in activities subject to taxation; and (b) the IRS sends the church written inquiry notice containing an explanation of the following: (1) the specific concerns which gave rise to the inquiry, (2) the general subject matter of the inquiry, and (3) the provisions of the Internal Revenue Code that authorize the inquiry and the applicable administrative and constitutional provisions, including the right to an informal conference with the IRS before any examination of church records, and the first amendment principle of separation of church and state.

2. The IRS may begin a church tax examination of the church records or religious activities of a church only under the following conditions: (a) the requirements of a church tax inquiry have been met, and (b) an examination notice is sent by the IRS to the church at least fifteen days after the day on which the inquiry notice was sent, and at least fifteen days before the beginning of such an examination, containing the following information: (1) a copy of the inquiry notice, (2) a specific description of the church records and religious activities which the IRS seeks to examine, (3) an offer to conduct an informal conference with the church to discuss and possibly resolve the concerns giving rise to the examination, and (4) a copy of all documents collected or prepared by the IRS for use in the examination and the disclosure of which is required by the Freedom of Information Act.

3. Church records (defined as all corporate and financial records regularly kept by a church, including corporate minute books and lists of members and contributors) may be examined only to the extent necessary to determine the liability for and amount of any income, employment, or excise tax.

4. Religious activities may be examined only to the extent necessary to determine whether an organization claiming to be a church is in fact a church.

5. Church tax inquiries and church tax examinations must be completed not later than two years after the examination notice date.³⁰

6. Church tax inquiries not followed by an examination notice must be completed not later than ninety days after the inquiry notice date.³¹

7. The IRS can make a determination based on a church tax inquiry or church tax examination that an organization is not a church that is exempt from federal income taxation or that is qualified to receive tax--deductible contributions, or that otherwise owes any income, employment, or excise tax (including the unrelated business income tax), only if the appropriate regional legal counsel of the IRS determines in writing that there has been substantial compliance with the limitations imposed under section 7611 and approves in writing of such revocation of exemption or assessment of tax.

8. Church tax examinations involving tax--exempt status or the liability for any tax other than the unrelated business income tax may be begun only for any one or more of the three most recent taxable years ending before the examination notice date. For examinations involving unrelated business taxable income, or if a church is proven not to be exempt for any of the preceding three years, the IRS may examine relevant records and assess tax as part of the same audit for a total of six years preceding the examination notice date. For examinations involving issues other than revocation of exempt status or unrelated business taxable income (such as examinations pertaining to employment taxes), no limitation period applies if no return has been filed.

9. If any church tax inquiry or church tax examination is completed and does not result in a revocation of exemption or assessment of taxes, then no other church tax inquiry or church tax examination may begin with respect to such church during the five--year period beginning on the examination notice date (or the inquiry notice date if no examination notice was sent) unless such inquiry or examination is (a) approved in writing by the Assistant Commissioner of Employee Plans and Exempt Organizations of the IRS, or (b) does not involve the same or similar issues involved in the prior inquiry or examination. The five--year period is suspended if the two--year limitation on the completion of an examination is suspended.

10. The limitations upon church tax inquiries and church tax examinations do not apply to

a. inquiries or examinations pertaining to organizations other than churches³²

b. any case involving a knowing failure to file a tax return or a willful attempt to defeat or evade taxes³³

c. criminal investigations

d. the tax liability of a contributor to a church, or inquiries regarding assignment of income to a church or a vow of poverty by an individual followed by a transfer of property³⁴

e. routine IRS inquiries, including

(1) the filing or failure to file any tax return or information return by the church;

(2) compliance with income tax or FICA tax withholding;

(3) supplemental information needed to complete the mechanical processing of any incomplete or incorrect return filed by a church;

(4) information necessary to process applications for exempt status, letter ruling requests, or employment tax exempt requests; or

(5) confirmation that a specific business is or is not owned by a church.

11. If the IRS has not complied substantially with (a) the notice requirements, (b) the requirement that an appropriate high--level Treasury official approve the commencement of a church tax inquiry, or (c) the requirement of informing the church of its right to an informal conference, the church's exclusive remedy is a stay of the inquiry or examination until such requirements are satisfied.

The fact that the IRS has authority to examine church records and the religious activities of a church or religious denomination does not necessarily establish its right to do so. The courts have held that an IRS summons or subpoena directed at church records must satisfy the following conditions to be enforceable:

1. It is issued in good faith. Good faith in this context means that (a) the investigation will be conducted pursuant to a legitimate purpose, (b) the inquiry is necessary to that purpose, (c) the information sought is not already within the IRS' possession, and (d) the proper administrative steps have been followed.³⁵

2. It does not violate the church's first amendment right to freely exercise its religion. An IRS subpoena will not violate a church's first amendment rights unless it substantially burdens a legitimate and sincerely held religious belief, and is not supported by a compelling governmental interest that cannot be accomplished by less restrictive means. This is a very difficult test to satisfy, not only since few churches can successfully demonstrate that enforcement of an IRS summons or subpoena substantially burdens an actual religious tenet, but also because the courts have ruled that maintenance of the integrity of the government's fiscal policies constitutes a compelling governmental interest that overrides religious beliefs to the contrary.³⁶

3. It does not create an impermissible entanglement of church and state.³⁷

Further, federal law provides that if the IRS wants to retroactively revoke the tax--exempt status of a church, then it must show either that the church “omitted or misstated a material fact” in its original exemption application, or that the church has been “operated in a manner materially different from that originally represented.”³⁸

Although IRS authority to examine and subpoena church records is very broad, it has limits. To illustrate, one subpoena was issued against all documents relating to the organizational structure of a church since its inception; all correspondence files for a three--year period; the minutes of the officers, directors, trustees, and ministers for the same three--year period; and a sample of every piece of literature pertaining to the church.³⁹ A court concluded that this subpoena was “too far reaching” and declared it invalid. It noted, however, that a “properly narrowed” subpoena would not violate the first amendment. Another federal court that refused to enforce an IRS subpoena directed at a church emphasized that “the unique status afforded churches by Congress requires that the IRS strictly adhere to its own procedures when delving into church activities.”⁴⁰ The court also stressed that the safeguards afforded churches under federal law prevent the IRS from “going on a fishing expedition into church books and records.”

The limitations of section 7611 may be illustrated by the following examples:

Example 1. First Church receives substantial rental income each year from several residential properties it owns in the vicinity of the church. The IRS has learned of the rental properties and would like to determine whether the church is engaged in an unrelated trade or business. It sends the church an inquiry notice in which the only explanation of the concerns giving rise to the inquiry is a statement that “you may be engaged in an unrelated trade or business.” This inquiry notice is defective since it does not specify the activities which may result in unrelated business taxable income.

Example 2. The IRS receives a telephone tip that First Church may be engaged in an unrelated trade or business. A telephone tip cannot serve as the basis for a church tax inquiry since such an inquiry may commence only if an appropriate high--level Treasury official reasonably believes on the basis of written evidence that a church is not tax--exempt, is carrying on an unrelated trade or business, or otherwise is engaged in activities subject to taxation.

Example 3. The IRS sends First Church written notice of a church tax inquiry on March 1. On March 10 of the same year it sends written notice that it will examine designated church records on April 15. The examination notice is defective. While it was sent at least 15 days before the beginning of the examination, it was sent less than 15 days after the date the inquiry notice was sent. The church's only remedy is a stay of the examination until the IRS sends a valid examination notice.

Example 4. An IRS inquiry notice does not mention the possible application of the first amendment principle of separation of church and state to church audits. Such a notice is defective. A church's only remedy is a stay of the inquiry until the IRS sends a valid inquiry notice.

Example 5. An IRS examination notice specifies that the “religious activities” of First Church will be examined as part of an investigation into a possible unrelated business income tax liability. Such an examination is inappropriate since the religious activities of a church may be examined by the IRS under section 7611 only to the extent necessary to determine if a church is in fact a bona fide church entitled to tax--exempt status.

Example 6. The IRS sends First Church written notice of a church tax inquiry on August 1. As of October 20 of the same year, no examination notice had been sent. The church tax inquiry must be concluded by November 1.

Example 7. The IRS sends an examination notice to First Church on September 1, 1991. On November 1 of the same year, as part of its examination, the IRS requests several documents that it reasonably believes are necessary. The church refuses to disclose the documents, and the IRS seeks a court order compelling disclosure. Such an order is issued on October 1, 1993. The two--year limitation on completing church examinations is suspended during the legal proceeding instituted by the IRS, and therefore the examination need not be terminated.

Example 8. In 1991, the IRS conducts an examination of the tax--exempt status of First Church. It concludes that the church was properly exempt from federal income taxation. In 1993, the IRS commences an examination of First Church to determine if it is engaged in an unrelated trade or business, and if it has been withholding taxes from nonminister employees. Such an examination is not barred by the prohibition against repeated examinations within a five--year period, since it does not involve the same or similar issues.

Example 9. First Church knowingly fails to withhold federal income taxes from wages paid to its nonminister employees despite its knowledge that it is legally required to do so. The limitations imposed upon the IRS by section 7611 do not apply.

Example 10. The IRS commences an examination of a separately incorporated private school that is controlled by First Church. The limitations of section 7611 do not apply.

Unincorporated Associations

Corporations

Reporting Requirements for Churches

Church Names

Church Officers, Directors, and Trustees

Church Members

Church Business Meetings

Removing Disruptive Individuals

Powers of a Local Church

Church Merger and Consolidation

Dissolution of a Church